The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
ABOLITION OF 10% RATE OF INCOME TAX
Although Gordon Brown announced it in his budget speech in 2007, only now has the abolition of the 10% rate of income tax become headline news.
The tax profession welcomed the 2007 announcement. It seemed at the time we were moving from three tax rates to two. Anything which helps to simplify tax is a good thing.
What neither Brown nor the tax profession foresaw was the strength of the backlash.
For some of the lowest paid people in our society the change means an increase in income tax of over £200 per annum.
On reflection, perhaps we in the profession were guilty of putting simplification ahead of the simple financial needs of the poorest. A lesson for us there.
And perhaps there is a lesson for the politicians too. The lesson is that if you play games with tax you may enjoy short term popularity but you will probably endure long term derision.
If it was right to introduce the 10% rate in 1999 why is it necessary to withdraw it now?
The cynics would say the answer is that tax policy has become a tool for headline grabbing. In 1999 the introduction of the new lower rate was trumpeted as a generous tax cut. In 2007 the reversal was announced as a sensible simplification.
Perhaps tax rate setting should be transferred to an independent body in the same way that interest rate setting has been transferred to the Bank of England.
At least the government can console itself with the fact it has helped to simplify our tax rates.
Well, actually, no it can not. The 10% starting rate lives on. In the year 2008/09 the 10% rate applies to savings income and capital gains in certain circumstances. It is almost too complicated to explain. If you really want to know how it works visit the web page which the Revenue has put together to explain it.
So in actual fact we have the worst of all worlds! We have a tax increase for the poorest workers and we have extra complication for savers. That is some achievement!
NOT A PENSION
A few years ago some tax planners dreamed up a clever scheme to enable individuals to unlock the value in their pension schemes.
In a nutshell the scheme worked like this.
You need money and you need it now. You have pension benefits which you cannot access because you have not yet reached your retirement date. You become an employee of H Ltd. You transfer your pension benefits to H Ltd’s pension scheme. Upon receiving the pension benefits, H Ltd’s pension scheme makes you a loan of an amount equal to about 80% of your pension benefits. The loan is repayable at the time the pension is supposed to start. If the loan is not repaid the pension is forfeited.
In practice nobody repays their loans. The theory behind the scheme is that the receipt of the loan is not a taxable receipt.
A certain Mr Dunne took part in the scheme. His pension benefits were worth £43,600. He received a loan of £33,600 from the H Ltd pension scheme in September 2001.
He claimed he was employed by H Ltd from July to October 2001. He received a salary of £80 on which he paid tax of £17.30.
HMRC attacked the scheme on the basis that Mr Dunne was not a real employee of H Ltd. It claimed the transfer was a sham to obtain accrued pension benefits in advance of retirement.
HMRC was helped with its case by a witness who had been in the same position as Mr Dunne. The witness told the Commissioner that he had not been expected to do any work for H Ltd.
The Commissioner held there was no contract of employment between Mr Dunne and H Ltd. The relationship was a sham to enable him to obtain his pension benefit before his retirement.
Mr Dunne’s appeal was dismissed. The loan of £33,600 was in reality pension income. Tax payable £14,160 plus interest and penalties.
No doubt HMRC will now go after the other 307 employees on the payroll of H Ltd in 2001/02, none of whom paid any national insurance (which really does demonstrate the employments were a sham).
When you practise tax for a while you develop a sense for what works and what doesn’t. We were aware of this scheme but our senses told us it wouldn’t work and we deployed the bargepole.
Our Advice: Never turn down an opportunity to have a look at a clever tax scheme but always retain a healthy sense of scepticism and keep a bargepole handy just in case.
HMRC ENQUIRIES INTO YOUR TAX RETURN
Since the introduction of self assessment in 1996/97, HMRC has had a limited amount of time in which to make enquiries into tax returns. The amount of time varied from taxpayer to taxpayer, depending on when HMRC received the return.
A taxpayer must file a return by 31 January following the end of the relevant tax year. This deadline is known as the ‘filing date’. HMRC could open an enquiry in to a return at any time from the time of its receipt up to the first anniversary of the filing date.
The returns of those who filed early were vulnerable to selection for enquiry for a longer period of time than the returns of those who filed just before the filing date.
A small number of taxpayers delayed the submission of their returns until the last minute in the belief that giving the Revenue only twelve months in which to open an enquiry reduced the chances of their returns being selected. HMRC always denied the time of submission had any bearing on the cases selected.
For tax years starting with 2007/08 this delaying strategy definitely does not achieve its intended purpose. For 2007/08 and onwards HMRC will have a period of twelve months from the time it receives a return in which to open an enquiry. Every taxpayer’s return will be vulnerable to selection for enquiry for exactly the same length of time.
Our Advice: This is a welcome improvement to the self assessment system. It can now be seen quite clearly that all taxpayers are treated equally. One continuing advantage of filing early is that HMRC statements show accurate (as opposed to an absence of) figures.
A TAX RETURN, PLEASE
Did you make a taxable gain in 2007/08?
Did you receive income on which you have yet to pay tax or on which you owe further tax?
If so, it is your responsibility to notify H M Revenue & Customs of the fact that you owe tax. If you don’t receive a tax return you must give the Revenue notice of your chargeablilty within six months of the end of the tax year.
Many people adopt the attitude “I don’t need to fill in a tax return because the Revenue hasn’t sent me one.” This is rather short sighted. The penalty for failure to notify chargeablility to tax is up to 100% of the tax still unpaid at 31 January following the end of the tax year.
Our Advice: There is nothing to gain and much to lose by burying your head in the sand. If you have a tax liability and you haven’t received a tax return, write to your tax office to request one.
Three apprentices failed to show up for training. The coach is furious. He tracks them down to a farm on the edge of town.
The apprentices dash in to a barn and they each hide in a sack.
The coach bursts in and walks over to the first sack. He gives it a firm kick. “Woof” shouts the apprentice. The coach says to himself, “There’s just a dog in there,” and moves on.
He walks over to the second sack and gives it a good old boot. “Meeeooow” shouts the apprentice. The coach shrugs his shoulders and moves on.
He reaches the third sack. Again he puts the boot in and the apprentice shouts “Potatoes!!”
Copyright: K P Bonney & Co LLP 2008. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer: The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.
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